Covering loss of rent: What are the options?
From rent default insurance to a guarantee and rent factoring
Protect yourself against non-payment of rent
Loss of rent is a major risk for landlords. If the monthly rent is not paid, this can cause considerable financial problems. But how can you protect yourself against this?
The first steps: Tenant selection and credit check
Before you even look at insurance or other methods of protection, make sure you're renting to reliable tenants. Careful tenant selection is the first step in avoiding rent defaults. This includes a thorough credit check, where you check the financial situation of your potential tenants. A reference check with the previous landlord can also be helpful.
Rental guarantees as collateral
Especially for tenants without a long rental track record, such as students or young professionals, rental guarantees can be a useful safeguard. Here, parents or another third party guarantee to act as surety if the tenant fails to pay the rent. The usual guarantee amount is often two months' rent. In addition to the rent guarantee, a security deposit is usually also required, which can be deposited in a special deposit account.
Rent guarantee vs. rent default insurance
If you're looking for further security against rent defaults, there are two main options: Rent guarantees and rent default insurance.
Rent guarantees: A rent guarantee is an agreement between you as the landlord and a third party, such as a bank or insurance company. This party guarantees to cover the rent if the tenant becomes insolvent. However, you as the landlord retain the responsibility to take legal action against insolvent tenants.
Loss of rent insurance: Loss of rent insurance is a policy that protects landlords against the financial risk of loss of rent. In the event of a tenant default, the insurance covers the loss of rent incurred and also takes over the collection. So as a landlord, you don't have to worry about collecting the rent. The insurance company bears the risk of loss of rent and pays you an agreed sum.
What you should pay attention to when closing
Before you purchase rental loss insurance, it's important to review the terms and costs. The cost of the insurance is often set as a percentage of the rental amount to be covered. The insurance company will also review your risk profile as a landlord and that of the property. In addition, there is usually a credit check of the tenant before the policy is issued. Most insurance policies also have a grace period during which the protection does not take effect immediately.
What is not covered by a loss of rent insurance?
It is important to note that not all rental damage is covered by rental loss insurance. As a rule, intentional damage or damage caused by improper care of the property is not covered. It is therefore advisable to check the exact terms and exclusions in your insurance policy.
Loss of rent insurance for current leases?
As a rule, you can take out loss of rent insurance for both new leases and current leases. Note, however, that there may be a waiting period before the insurance coverage takes effect.
Rental factoring as an alternative hedge
An alternative way to protect against rent default is rent factoring. In this case, you sell your rent receivables to a factoring company. The company pays you a large part of the receivable directly and takes over the collection of the outstanding rent as well as the risk of non-payment. However, you only receive part of the receivable because the company charges fees. You also lose the ability to make individual payment arrangements with your tenants.
Conclusion: Choose the right coverage for loss of rent
Protection against loss of rent is critical to minimizing financial risks as a landlord. There are several options available, including rent guarantees, rent guaranties, rent default insurance and rent factoring. Each option has its pros and cons, and the choice depends on your individual situation and risk profile. Before you decide, it's important to carefully review the terms, costs and exclusions, and seek professional advice if necessary.